Pennsylvania Local Gross Receipts Taxes: Imposition Resolved?
Matthew D. Melinson, CPA
Local gross receipts taxes imposed under the Pennsylvania Local Tax Enabling Act (“LTEA”)1 present significant challenges to practitioners and taxpayers. Court decisions have provided some clarity with respect to jurisdictional issues; however, apportionment among jurisdictions remains an open question. Historically, the Mercantile License Tax was levied on wholesalers, retailers and restaurants, while the Business Privilege Tax was imposed on the gross receipts of service or “other” businesses. Today, the terms “Mercantile License Tax” and “Business Privilege Tax” are often used interchangeably, and will be referred to collectively throughout this discussion as local gross receipts taxes. The LTEA limits taxes on wholesale businesses to a maximum rate of 1 mill, while taxes on retail businesses and restaurants are limited to 1.5 mills on the gross volume of business.2 Tax rates for service businesses are not limited by the LTEA. Maintenance of One “Base of Operations” In an important recent decision, the Commonwealth Court of Pennsylvania held in QED3 that a company is not liable for Business Privilege Tax where it does not maintain a “base of operations,” such as maintaining an office. Thus, despite the fact that QED was awarded more than $4.3 million worth of building construction contracts in Lower Merion Township, it was not subject to the Lower Merion Business Privilege Tax because it did not maintain a “base of operations” there.4 Previously, in Gilberti,5 the Pennsylvania Supreme Court held that the maintenance of a business office in the City of Pittsburgh was an exercise of a privilege “within the limits” of the taxing jurisdiction. There-fore, the city could levy a business tax against gross receipts under the LTEA that included income derived from services performed at locations outside the city limits. The court held that the tax may be levied upon a privilege exercised within the city, such as maintenance of a business office. The fact that the amount of tax was dependent upon the taxpayer’s gross receipts, including receipts from services performed outside the city, did not undermine the legitimacy of the tax. Whether a business is “maintaining an office” in a particular jurisdiction is not always clear. In Wagman,6 a construction corporation had only one permanent office from which it conducted business, i.e., its corporate headquarters. The taxpayer, hoping to avoid paying tax on all of its intrastate receipts, claimed to have temporary “on-site offices” in the jurisdictions in which it performed construction services. The Commonwealth Court held that regardless of whether employees performed services elsewhere, Manchester was still the company’s sole permanent business headquarters and could tax all of the company’s gross intrastate receipts. Based on Wagman, it appears that a temporary office, such as a trailer, may not constitute a sufficient “office” to subject a corporation to a jurisdiction’s Gross Receipts Tax. Thus, all receipts should be reported to the jurisdiction in which the company’s only permanent office is located. In effect, QED is the flip side of Wagman, and squares the circle of that case. The LTEA does not contemplate the existence of businesses engaged in interstate commerce. Although many jurisdictions exclude interstate receipts from the measure of tax, such exclusion may not be required,7 presumably because a Business Privilege Tax is not a direct tax on interstate commerce, but a tax on the privilege of maintaining a business office within the township. Maintenance of Two or More “Bases of Operations” Although the jurisdictional issue now may be clear, the apportionment of receipts among various jurisdictions remains unresolved. The LTEA prohibits multiple taxation, but is silent as to how such prohibition is to be enforced. Formula apportionment as required by the states is not incorporated into the LTEA or many local ordinances. As a result, controversies often arise as to how to allocate taxable gross receipts among jurisdictions, and whether certain receipts of businesses with multiple offices may escape taxation entirely. Suppose a taxpayer has bona fide offices in Jurisdictions A and B, yet it performs services in Jurisdiction C. Where are these receipts to be taxed? QED appears to stand for the premise that C cannot tax those receipts; however, both A and B have a legitimate claim to tax the entity’s gross receipts. Certainly, 100 percent of receipts attributable to services performed within C cannot be allocated to both A and B, as this would result in a double taxation of the same receipts. Should these receipts be divided evenly between the two jurisdictions? Can a taxpayer use any reasonable method of apportionment? Does the answer change if one or more of the offices is located outside Pennsylvania? Perhaps the answer lies in which office “manages, directs and controls”8 the activities in Jurisdiction C, but this may not always be easily determinable. There are no definitive answers to these questions. With the issue of jurisdiction presumably settled at this point, it is likely that apportionment will be the next issue addressed by the courts regarding local gross receipts taxes. 1 53 P.S. §§ 6901-6924. The Philadelphia Business Privilege Tax (“BPT”), which is partially based on gross receipts, is excluded from this discussion, since that tax is levied under the First Class City Reform Act (53 P.S. § 16181), not the LTEA. Also, the rules governing the BPT have been well established and do not seem to be as controversial as far as allocation of receipts. 2 53 P.S. § 6908(2). Note that Pittsburgh is permitted to impose a 2-mill tax on retailers and restaurants. 3 Township of Lower Merion v. QED, Inc., 738 A.2d 1066 (Pa. Commw. Ct., Aug. 13, 1999). 4 It is the author’s understanding that the statute of limitations to appeal this case to the Pennsylvania Supreme Court remains open and that it is likely that this case will be appealed. 5 Louis F. Gilberti v. The City of Pittsburgh, 511 A.2d 1321, 511 Pa. 100 (1986). 6 G.A. & F.C. Wagman, Inc. v. Manchester Township, 535 A.2d 702, 112 Pa. Commw. 357 (1988). 7 Lawrence G. Spielvogel v. Township of Cheltenham, 601 A.2d 1310, 144 Pa. Commw. 510 (1992). 8 See Gilberti, 511 Pa. at 109, 511 A.2d at 1326. Matthew D. Melinson, CPA, is a manager in the state tax consulting group of PricewaterhouseCoopers LLP, Philadelphia office. He can be reached at matthew.d.melinson@ us.pwcglobal.com The author gratefully acknowledges the assistance of Robert Porcelli, tax associate, PricewaterhouseCoopers LLP in researching this column.
Copyright Pennsylvania Institute of Certified Public Accountants Winter 2001
LAST UPDATED 1/1/2001